Even now, the social costs of controlling inflation seem horrendous. Over a four-year period (1979-82), the U.S. economy's output barely increased. It nudged ahead in the first two years and then fell back in the last two. Since 1950, there had been nothing like that. Unemployment peaked in 1982 near 11 percent—a figure that, a few years earlier, would have been widely judged as inconceivable. Although lower inflation benefited most people, the casualties were numerous and broadly dispersed geographically and socially: small business owners, overextended farmers, industrial workers. The number of business failures in 1982 (24,908) was nearly 50 percent higher than any other year since World War II, and it would double to 52,078 by 1984. From 1979 to 1983, farm income declined almost 50 percent. Behind the statistics were countless individual stories. As late as October 1983, Newsweek quoted Michael Wilk, a thirty-one-year-old technician who'd lost his job at an auto parts company outside Detroit eleven months earlier. He'd been unable to find new work. "I go from feeling depressed to not caring about anything and back again," he said. "Sometimes I'm so paralyzed by it all that I just sit and stare out the window."36

But against these heartbreaking costs, there were larger long-term gains. When Reagan left office, Americans still worried about inflation, but it no longer gripped them with fear. Inflation was one problem among many, not a scourge shredding the social fabric. Once the recession lifted, the economy and productivity growth revived impressively. Of all Reagan's economic achievements, this was the most definitive. Indeed, the rest of his economic record was mixed. Although he reduced tax rates and simplified the tax code, federal government spending as a share of national income barely changed during his two terms; tax burdens did drop, and budget deficits rose.*

* In 1980, total federal taxes were 19 percent of GDP; in 1988, Reagan's last full year in office, they were 18.1 percent of GDP. Over the same

By contrast, the taming of inflation reinvigorated the economy as nothing else; the expansion lasted from early 1983 until the late summer of 1990. At the time, it was the second longest peacetime expansion in U.S. history. The Volcker-Reagan campaign discredited many of the ideas that had misgoverned national economic policy for nearly two decades. The notion that the Federal Reserve couldn't control inflation was discredited. The notion that a litde less unemployment could be exchanged for a little more inflation was discredited. In their place, a consensus slowly developed that "price stability"—a vague term that both Volcker and his successor, Alan Greenspan, defined as inflation so low that it barely affected people's decisions—was desirable and would promote a more stable and productive economy. The consensus was not immediately obvious, but it developed in time.

It is worth reflecting upon the happenstance that contributed to this achievement. The fact that Congress and the public focused heavily on Reagan's tax and budget proposals—seen as the centerpieces of the administration's economic program—in 1981, and even 1982, spared the Federal Reserve and Volcker some of the early criticism they might otherwise have received. That almost everyone underestimated the severity of the 1981-82 recession meant that its power to suppress inflation was also underestimated. This poses an intriguing question: Would Volcker and Reagan have proceeded so forcefully knowing in advance the recession's full wrath, or would they have flinched? These questions can never be answered, but years, federal spending fell from 21.7 percent of GDP to 21.1 percent of GDP. The deficit rose from 2.7 percent of GDP to 3 percent.

what seems certain is that without Reagan and Volcker, the assault on inflation would have been less concerted and less successful. The irony is that, despite the success, relations between the Reagan administration and Volcker never became close or warm. Reagan nominated him to a second four-year term as Fed chairman in 1983, despite opposition from some White House officials. He was not reappointed in 1987. Volcker has said he had promised his wife (who remained living in New York) not to take a third term, but many top administration officials wanted him gone.

Whatever the full story, the achievement of Reagan and Volcker was profound—and it was as much about politics as economics. One of the dilemmas of a democratic society is how to take actions that, though immediately painful and unpopular, seem essential to the society's long-term well-being. Coping with double-digit inflation posed precisely this problem. Any realistic program was bound to hurt millions of Americans, almost all innocent victims. This was so obvious that in the late 1970s a frontal assault on inflation seemed impossible.* In this sense, Arthur Burns s political diagnosis was en

* It's worth emphasizing how much the Volcker-Reagan approach disregarded conventional economic wisdom. Most economists believed that a determined effort to reduce inflation to low levels would require horrendous unemployment, surpassing the levels even of the Great Depression. Six respected economic models examined in the late 1970s predicted that, on average, an extra percentage point of unemployment (above the "natural rate") maintained for a year would reduce inflation by only 0.3 percentage points—about a third of a percent. By this math, achieving the inflation reduction that actually occurred in the early 1980s would have required average unemployment of about 20 percent tirely accurate. Economists and politicians dealt with the dilemma by proposing many unrealistic solutions, from wage-price controls to credit controls to a gradual squeezing of the money supply. All promised fairly painless ways to defeat inflation. Abstractly, all seemed plausible. In reality—meaning in the world of ordinary people and businesses—they weren't. Their appeal was political and psychological. They made their adherents feel and look good. They could pretend to be addressing a serious problem when they were actually evading it.

By contrast, Volcker's approach lacked sophistication. Its chief virtue was that it might actually succeed. But it could not succeed unless it had time to work, and time is what Reagan supplied. It is another unanswerable question as to whether Reagan would have independently pressured a Fed headed by someone else to undertake the same ruthless attack. But presented with it, he provided unwavering support. The ultimate accomplishment of Reagan and Volcker was to show that government could govern and, in so doing, they restored—at least temporarily—Americans' confidence in their leaders and political institutions.

for two years, much higher than actually occurred (average unemployment was 7.6 percent in 1981 and 9.7 percent in 1982) and comparable to the levels of the Great Depression. (See Arthur M. Okun, "Efficient Disinflationary Policies," American Economic Review (May 1978): 348-52.)

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